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A background to the butter dilemma

The shortfall in butter production in Europe is driving up wholesale prices, and yes retail prices are going to go up. However, the rises are much more dramatic in wholesale terms (doubled in a year) than they will be in retail terms.

Why is there not enough butter?

There is not enough butter because not enough milk was produced this spring – the peak time for milk production in the UK and the rest of Europe.

As well as the UK, this happened in the EU’s two biggest milk producing states, France and Germany, which between them produced around a third of the continent’s milk.

Europe is likely to end up with a butter shortfall of 50,000 tonnes compared to what it got through last year, according to best industry estimates.

Why not simply produce more butter?Because processors prioritise cheese production: because there are better returns and because they are committed to supply regular customers both in Europe and abroad.

What is the background to the situation?
Dairy production is dependent on thousands upon thousands of milk producers. These farmers, in Europe, felt their livelihoods squeezed as farmgate milk prices plummeted in 2015, only recovering - in the wake of higher commodity prices – in the middle of last year.

It coincided with EU efforts to recompense them for their losses, with a ‘milk reduction scheme’ taking 1.12 million tonnes of milk off the EU market. In other words, they were paid to produce less. Since then many have been producing at lower levels – encouraged by the banks to pay off their loans, rather than invest in bigger herds or extra feed.

Much lower returns for skimmed milk powder (SMP) have not helped processors. The returns are lower because of an intervention scheme under which the EU buys up SMP when it reaches a very low price. There are currently 350,000 tonnes in EU stores: a ‘powder mountain’ if you will.

SMP is a by-product of milk, and goes for export and into thousands of different food products. Processors rely on both, and only butter has been delivering for them. There are exceptions: farmers in Ireland have produced more milk and has been able to satisfy some extra demand. This is because Irish dairy cows are predominantly grass-fed and thus very much less dependent on bought-in feed, and they have enjoyed good grazing weather. But they make up only 3.7% of total EU milk output.

The EU-28 produced 744,100 tonnes of butter in the first four months of this year, according to official figures, down -5.3% – or 41,600 tonnes – from the same period last year.

UK output in this period was down -11.6% to 50,300 tonnes, or 6,600 tonnes less than the same four months of last year.

Irish production was 1% higher at 56,700 tonnes, just 600 tonnes higher. It is likely though, that Irish butter volumes will increase, with milk output in May running at 7.3% above that of last year.

What is the solution?Global supply and demand appears to be cyclical. The IFCN, a research body, have done some work on this. One factor may have been super-heated Chinese demand in 2014-15, which pumped up prices – which then inevitably fell, leading to lower milk returns for farmers, etc. But the good news is that IFCN says we are currently in an up-cycle.

Informa Agribusiness Intelligence’s IEG Vantage service indicates a global recovery in milk production in the second half of 2017, albeit from low levels. High futures prices will make it unlikely that butter wholesale prices will ease substantially for at least the next few months. However, a recent easing of futures prices may mean that the ‘butter bubble’ is showing some slight, early signs of deflating.

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See how changes in global dairy markets could impact your business, using in-depth insights from the IEG Vu dairy channel. Track dairy industry developments supported by essential price and production data.

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